CASE ANALYSIS The following comprehensive assessment is based on a continuing case study of Virtuoso Corporation. The following financial statements have been provided: Virtuoso Corporation Income Statement For the year ended June 30, 2021 Sales Cost of Goods Sold Gross Profit Selling & Marketing Costs Admin. Expenses Depreciation Expense Earnings before Interest & Taxes Interest Expense Taxable Income Taxation (30%) Net Income 2021 ('000s) 10,700 (4,320) 6,380 (380) (1,050) (250) 4,700 (120) 4,580 (1,374) 3.206 Dividends (35%) Addition to Retained Earnings 1,122 2,084 Virtuoso Corporation Statement of Financial Position As at June 30, 2020 & 2021 + 2020 ('000s) 2021 ('000s) 2020 ('000s) 2021 ('000s) ASSETS Current Assets Inventories Accounts Receivables Cash & Equivalents LIABILITIES & EQUITY Current Liabilities Accounts Payables Notes Payables 3,200 2,000 3,500 8,700 2,800 2,200 4.525 9,525 2,500 2.300 4,800 1,750 2,500 4,250 Non-current Liabilites 3,000 2.900 Non Current Assets, Net 5.300 6.009 Total Liabilities 7,800 7,150 Equity Common Stock Retained Earnings Total Equity 1,500 4,700 6,200 1,600 6,784 8,384 TOTAL ASSETS 14.000 15,534 TOTAL LIAB. & EQUITY_ 14.000 15.534 Question 1 25 Marks PARTA 20 Marks As part of your analysis, you are required to investigate Virtuoso Corporation's cash flows. Required: Using the financial statements provided on page 2 (a) Calculate the following for 2021: . Operating Cash Flow (1 Mark) ii. Net Capital Spending (1 Mark) iii. Change in Net Working Capital (2 Marks) iv. Cash Flow from Assets (2 Marks) V. Cash Flow to Creditors (2 Marks) vi. Cash Flow to Stockholders (2 Marks) (b) Analyse the company's sources and uses of cash for the year 2021 by preparing Virtuoso Corporation Cash Flow Statement for the year ended June 30, 2021. (10 Marks) PARTB 5 Marks To further analyse Virtuoso's cash flow position, the Finance Manager is seeking to determine if the company can comfortably meet any upcoming obligations. Required: Compute the following liquidity ratios for 2020 and 2021: i. Current ratio ii. Quick ratio iii. Cash ratio (2 Marks) (2 Marks) (1 Mark) Question 2 25 Marks PARTA 20 Marks To assist with evaluating potential capital projects, Virtuoso Corporation is seeking to determine its actual Weighted Average Cost of Capital (WACC). Utilising information from the financial statements presented on page 2, together with current information, the Finance Manager has compiled the following information as it pertains to the company's capital structure: Debt: Bonds outstanding have a face value of $2,761,905, currently selling at 105% of par. These bonds have 25 years left to maturity and a coupon rate of 10%. (Hint: you can use the lowest multiple of $1,000 for the YTM calculation only) Common stock: 40,000 shares of common stock outstanding with a market price of $40.00. The company intends to pay a dividend of $5.00 next year; for ease of computation, dividends are expected to grow by 4% annually. Additional Information: The Company's tax rate is 30%. Required: Calculate the Weighted Average Cost of Capital for Virtuoso Corporation. (20 Marks) PARTB 5 Marks The Finance Manager is trying to ensure that the company's excess cash holdings are all invested in interest-bearing short-term instruments. Virtuoso's bankers have provided details on enhanced savings accounts that is offered to business clients: Option 1: Annual interest rate of 8.15%, compounded monthly. Option 2: Annual interest rate of 8.25%, compounded quarterly. Required: Advise the Finance Manager on the best option. (5 Marks) Question 3 25 Marks PARTA 15 Marks Utilize the 2021 financial statements for Virtuoso Corporation provided on page 2 and assume that the company is currently operating at full capacity. Required: Prepare Pro-Forma statements for the year ending June 30, 2022 (rounding all figures to the nearest dollar) assuming: All costs/income/expenses and net working capital vary directly with sales/revenue. No new equity is raised. Sales are projected to increase by 20%. The tax rate and the dividend payout ratio will remain constant. Interest Expense will remain unchanged. Clearly state if Virtuoso Corporation will require external financing or if the company would have excess financing in 2022, and how much. (15 Marks) PARTB 10 Marks Based on the results of the pro-forma statement in part A above, Virtuoso is considering raising financing though the sale of additional common shares. The Finance Manager is however seeking to determine if the current value of its stock is fairly priced. The following anticipated dividend payout structure information is provided: Virtuoso is expected to pay dividends of $5.00 next year, after which it will decline consistently to $3.50, $2.50 and $2.00 respectively over years 2 to 4. Thereafter, the company is expected to increase dividends by an annual rate of 4%. The company currently assumes a required return of 9%, for simplicity. Required: Given the above, what should be the current price of Virtuoso's common shares? Question 4 25 Marks PARTA 10 Marks Given that the company will require external financing based on the 2022 pro forma statements, the Finance Manager making a proposal to the Board of Directors to issue additional debt in the form of a $1,000,000 10-year bond, with an annual coupon rate of 8%, and quarterly interest payments. Required: Given current market conditions and the company's credit ratings, if the Finance Manager anticipates that the bond will close at a yield to maturity of 10%, how much would an investor be willing to pay for $1,000 face value of this bond at issue? (10 Marks) PART B 15 Marks You have been tasked with evaluating the quantitative aspects of the two (2) independent projects, Alpha and Omega, that Virtuoso Corporation is considering undertaking in the upcoming year. The projected cash flows of both projects are as follows: Years Project DINU 0 1 2 (350,000) 115,000 115,000 250,000 (275,000) 75,000 100,000 125,000 3 The company currently assumes a required return of 9%, for simplicity. The following PV factors are provided: Year PV Factor (9%) 1 0.9174 2 0.8417 3 0.7722 Required: (a) Evaluate the projects using each of the following criteria, stating which project(s) Virtuoso Corporation should choose under each criteria and why: i. Payback (3 Marks) ii. Discounted Payback (6 Marks) iii. Net Present Value (3 Marks) Profitability Index (3 Marks) iv. Question 5 25 Marks PART A 15 Marks The CEO has advised the Finance Manager that in addition to the two (2) projects evaluated in question 4, the company would like to invest in a possible third project over the upcoming year. However, to do this, the company will have to borrow a 3-year $500,000 loan at an interest rate of 6% per annum to fund the project. Required: (a) Calculate the monthly repayment on this intended loan. (4 Marks) (b) Prepare the company's Amortization Schedule for the first three (3) months of this loan, clearly showing the interest and principal payments. (6 Marks) (c) The Finance Manager is also considering utilizing the proceeds of a short-term investment that is due to mature in October 2021 (instead of the borrowing the full amount of the loan). If Virtuoso Corporation was investing $3,750 monthly into an account over 5 years at a rate of 9%. compounded monthly, compute the value of this investment at the end of 5 years. (5 Marks) PART B 10 Marks A company's Return on Equity (ROE) is affected by three things: operating efficiency, asset use efficiency and financial leverage. The decomposition of ROE via the Du Pont Identity approach is a convenient way of systematically approaching financial statement analysis. If ROE is unsatisfactory by some measure, then the Du Pont identity tells you where to start looking. Required: Calculate Virtuoso Corporation's Return on Equity Using the Du Pont Identity for the year ended June 30, 2021. (10 Marks) CASE ANALYSIS The following comprehensive assessment is based on a continuing case study of Virtuoso Corporation. The following financial statements have been provided: Virtuoso Corporation Income Statement For the year ended June 30, 2021 Sales Cost of Goods Sold Gross Profit Selling & Marketing Costs Admin. Expenses Depreciation Expense Earnings before Interest & Taxes Interest Expense Taxable Income Taxation (30%) Net Income 2021 ('000s) 10,700 (4,320) 6,380 (380) (1,050) (250) 4,700 (120) 4,580 (1,374) 3.206 Dividends (35%) Addition to Retained Earnings 1,122 2,084 Virtuoso Corporation Statement of Financial Position As at June 30, 2020 & 2021 + 2020 ('000s) 2021 ('000s) 2020 ('000s) 2021 ('000s) ASSETS Current Assets Inventories Accounts Receivables Cash & Equivalents LIABILITIES & EQUITY Current Liabilities Accounts Payables Notes Payables 3,200 2,000 3,500 8,700 2,800 2,200 4.525 9,525 2,500 2.300 4,800 1,750 2,500 4,250 Non-current Liabilites 3,000 2.900 Non Current Assets, Net 5.300 6.009 Total Liabilities 7,800 7,150 Equity Common Stock Retained Earnings Total Equity 1,500 4,700 6,200 1,600 6,784 8,384 TOTAL ASSETS 14.000 15,534 TOTAL LIAB. & EQUITY_ 14.000 15.534 Question 1 25 Marks PARTA 20 Marks As part of your analysis, you are required to investigate Virtuoso Corporation's cash flows. Required: Using the financial statements provided on page 2 (a) Calculate the following for 2021: . Operating Cash Flow (1 Mark) ii. Net Capital Spending (1 Mark) iii. Change in Net Working Capital (2 Marks) iv. Cash Flow from Assets (2 Marks) V. Cash Flow to Creditors (2 Marks) vi. Cash Flow to Stockholders (2 Marks) (b) Analyse the company's sources and uses of cash for the year 2021 by preparing Virtuoso Corporation Cash Flow Statement for the year ended June 30, 2021. (10 Marks) PARTB 5 Marks To further analyse Virtuoso's cash flow position, the Finance Manager is seeking to determine if the company can comfortably meet any upcoming obligations. Required: Compute the following liquidity ratios for 2020 and 2021: i. Current ratio ii. Quick ratio iii. Cash ratio (2 Marks) (2 Marks) (1 Mark) Question 2 25 Marks PARTA 20 Marks To assist with evaluating potential capital projects, Virtuoso Corporation is seeking to determine its actual Weighted Average Cost of Capital (WACC). Utilising information from the financial statements presented on page 2, together with current information, the Finance Manager has compiled the following information as it pertains to the company's capital structure: Debt: Bonds outstanding have a face value of $2,761,905, currently selling at 105% of par. These bonds have 25 years left to maturity and a coupon rate of 10%. (Hint: you can use the lowest multiple of $1,000 for the YTM calculation only) Common stock: 40,000 shares of common stock outstanding with a market price of $40.00. The company intends to pay a dividend of $5.00 next year; for ease of computation, dividends are expected to grow by 4% annually. Additional Information: The Company's tax rate is 30%. Required: Calculate the Weighted Average Cost of Capital for Virtuoso Corporation. (20 Marks) PARTB 5 Marks The Finance Manager is trying to ensure that the company's excess cash holdings are all invested in interest-bearing short-term instruments. Virtuoso's bankers have provided details on enhanced savings accounts that is offered to business clients: Option 1: Annual interest rate of 8.15%, compounded monthly. Option 2: Annual interest rate of 8.25%, compounded quarterly. Required: Advise the Finance Manager on the best option. (5 Marks) Question 3 25 Marks PARTA 15 Marks Utilize the 2021 financial statements for Virtuoso Corporation provided on page 2 and assume that the company is currently operating at full capacity. Required: Prepare Pro-Forma statements for the year ending June 30, 2022 (rounding all figures to the nearest dollar) assuming: All costs/income/expenses and net working capital vary directly with sales/revenue. No new equity is raised. Sales are projected to increase by 20%. The tax rate and the dividend payout ratio will remain constant. Interest Expense will remain unchanged. Clearly state if Virtuoso Corporation will require external financing or if the company would have excess financing in 2022, and how much. (15 Marks) PARTB 10 Marks Based on the results of the pro-forma statement in part A above, Virtuoso is considering raising financing though the sale of additional common shares. The Finance Manager is however seeking to determine if the current value of its stock is fairly priced. The following anticipated dividend payout structure information is provided: Virtuoso is expected to pay dividends of $5.00 next year, after which it will decline consistently to $3.50, $2.50 and $2.00 respectively over years 2 to 4. Thereafter, the company is expected to increase dividends by an annual rate of 4%. The company currently assumes a required return of 9%, for simplicity. Required: Given the above, what should be the current price of Virtuoso's common shares? Question 4 25 Marks PARTA 10 Marks Given that the company will require external financing based on the 2022 pro forma statements, the Finance Manager making a proposal to the Board of Directors to issue additional debt in the form of a $1,000,000 10-year bond, with an annual coupon rate of 8%, and quarterly interest payments. Required: Given current market conditions and the company's credit ratings, if the Finance Manager anticipates that the bond will close at a yield to maturity of 10%, how much would an investor be willing to pay for $1,000 face value of this bond at issue? (10 Marks) PART B 15 Marks You have been tasked with evaluating the quantitative aspects of the two (2) independent projects, Alpha and Omega, that Virtuoso Corporation is considering undertaking in the upcoming year. The projected cash flows of both projects are as follows: Years Project DINU 0 1 2 (350,000) 115,000 115,000 250,000 (275,000) 75,000 100,000 125,000 3 The company currently assumes a required return of 9%, for simplicity. The following PV factors are provided: Year PV Factor (9%) 1 0.9174 2 0.8417 3 0.7722 Required: (a) Evaluate the projects using each of the following criteria, stating which project(s) Virtuoso Corporation should choose under each criteria and why: i. Payback (3 Marks) ii. Discounted Payback (6 Marks) iii. Net Present Value (3 Marks) Profitability Index (3 Marks) iv. Question 5 25 Marks PART A 15 Marks The CEO has advised the Finance Manager that in addition to the two (2) projects evaluated in question 4, the company would like to invest in a possible third project over the upcoming year. However, to do this, the company will have to borrow a 3-year $500,000 loan at an interest rate of 6% per annum to fund the project. Required: (a) Calculate the monthly repayment on this intended loan. (4 Marks) (b) Prepare the company's Amortization Schedule for the first three (3) months of this loan, clearly showing the interest and principal payments. (6 Marks) (c) The Finance Manager is also considering utilizing the proceeds of a short-term investment that is due to mature in October 2021 (instead of the borrowing the full amount of the loan). If Virtuoso Corporation was investing $3,750 monthly into an account over 5 years at a rate of 9%. compounded monthly, compute the value of this investment at the end of 5 years. (5 Marks) PART B 10 Marks A company's Return on Equity (ROE) is affected by three things: operating efficiency, asset use efficiency and financial leverage. The decomposition of ROE via the Du Pont Identity approach is a convenient way of systematically approaching financial statement analysis. If ROE is unsatisfactory by some measure, then the Du Pont identity tells you where to start looking. Required: Calculate Virtuoso Corporation's Return on Equity Using the Du Pont Identity for the year ended June 30, 2021. (10 Marks)